Top 10 Cheap Dividend Stocks

Updated on 2025/01/02.

Finding quality dividend stocks in today's market can be challenging, especially when aiming for value and potential upside. But what if we had a straightforward and logical process to guide us? This post is dedicated to uncovering the Top 10 Cheap Dividend Stocks, highlighting companies that offer attractive yields and valuations suggesting growth opportunities ahead.

Our methodology is straightforward yet meticulous. The screening process identifies stocks based on the difference between their 5-year average Price-to-Earnings (P/E) ratio and their current P/E ratio. To ensure data integrity, any stocks with a ratio difference exceeding 1000% are excluded from consideration—indicating potential anomalies in the numbers. Additionally, only positive P/E ratios are considered, narrowing the focus to companies with established earnings.

For this analysis, we’ve drawn our stock universe from the iShares Select Dividend ETF (Ticker: DVY), a widely recognized benchmark of S&P 500 companies. All P/E ratio data and company profiles were sourced directly from Schwab’s robust Thinkorswim platform, ensuring accuracy and reliability.

Why the Difference Between the 5-Year Average P/E Ratio and Current P/E Ratio Might Be a Good Investment Indicator

The comparison between a company's 5-year average P/E ratio and its current P/E ratio can provide valuable insights into the relative valuation of a stock. This approach helps investors assess whether the stock is underpriced or overpriced compared to its historical norms, potentially identifying attractive investment opportunities. Here’s why this metric might be useful:

Contextualizing Valuation

What It Tells You

• The 5-year average P/E ratio represents how the market has historically valued the company relative to its earnings over a medium-term period.
• The current P/E ratio reflects how the market values the company at this moment.
• The difference between the two provides a benchmark to determine if the stock is currently trading above or below its historical valuation.

Why It Matters

• Stocks trading below their historical average P/E may indicate undervaluation, presenting a buying opportunity.
• Stocks trading above their historical average P/E may indicate overvaluation or high investor expectations.

Benefits of Using This Comparison

a. Identifying Undervalued Stocks

• If the current P/E ratio is significantly lower than the 5-year average, it could suggest the stock is temporarily out of favor due to short-term market factors, presenting an opportunity to buy at a discount.
• Example: A high-quality company experiencing a temporary earnings dip or negative market sentiment could see its P/E fall below historical norms, even if its long-term prospects remain strong.

b. Spotting Overvaluation Risks

• Conversely, if the current P/E ratio is much higher than the 5-year average, it could indicate that the stock is overpriced. This might signal caution for potential buyers or an opportunity to take profits for existing investors.

c. Adjusting for Sector-Specific Trends

• By comparing a stock’s current P/E with its historical P/E, investors account for industry-specific valuation norms, avoiding overreliance on market-wide P/E benchmarks.

d. Helps Assess Market Sentiment

• Large discrepancies between current and historical P/E ratios often reflect shifts in investor sentiment. Understanding this can help identify stocks that are either irrationally punished or hyped.

When This Strategy Works Best

a. For Established Companies

• This approach is most effective for mature companies with consistent earnings over time, as their historical P/E averages provide a reliable benchmark.

b. In Stable Market Conditions

• In periods of relative market stability, comparing the current P/E with historical averages provides clearer signals than during market crises or bubbles, where valuations may deviate widely.

c. As Part of a Broader Analysis

• This metric works best when combined with other valuation tools (e.g., PEG ratio, dividend yield) and an understanding of the company’s fundamentals.

Potential Triggers for P/E Discrepancies

a. Positive Triggers

• Earnings Growth Potential: The market might undervalue future growth if earnings are expected to rebound significantly.
• Temporary Setbacks: Short-term challenges (e.g., a missed quarter or regulatory issues) could lead to undervaluation.

b. Negative Triggers

• Declining Fundamentals: A higher-than-average P/E could indicate deteriorating business conditions, with the market expecting lower future earnings.
• Speculative Behavior: Overenthusiastic investor sentiment might drive the current P/E far above historical norms, increasing the risk of a correction.

Advantages of Using This Metric

a. Historical Anchoring

• Provides a reference point for valuation, helping investors avoid overpaying or underestimating a stock’s potential.

b. Simplicity and Intuition

• This metric is easy to calculate and interpret, making it accessible to a wide range of investors.

c. Adaptive to Industry Trends

• Reflects industry-specific valuation trends over time, offering a more nuanced view than a one-size-fits-all benchmark.

d. Combines Growth and Value Perspectives

• By identifying where a stock’s valuation stands relative to its past, this approach balances growth and value investing principles.

Risks and How to Mitigate Them

a. Changing Fundamentals

• Risk: A stock trading below its historical P/E may reflect structural changes in the business or industry that justify the lower valuation.
• Solution: Analyze the company’s fundamentals, including earnings quality, competitive position, and industry trends, to ensure the discount is temporary.

b. Short-Term Noise

• Risk: Current market conditions or sentiment may skew valuations without reflecting underlying business performance.
• Solution: Use this metric as part of a broader analysis, incorporating other valuation tools and qualitative insights.

c. Industry-Specific Dynamics

• Risk: P/E averages vary across sectors, and what seems undervalued in one industry may not apply in another.
• Solution: Compare the company’s P/E ratio to both its historical norms and peers within the same industry.

Real-Life Examples

a. Undervalued Stock

• A blue-chip company like Procter & Gamble might trade below its 5-year average P/E due to a temporary slowdown in sales. For long-term investors, this could represent a buying opportunity if fundamentals remain intact.

b. Overvalued Stock

• A tech company like NVIDIA might trade significantly above its 5-year average P/E due to hype around AI growth. While its prospects are strong, the high valuation might indicate a need for caution.

Ready to uncover which companies are trading at the steepest discounts? Stick around to the end to discover the stock offering the biggest potential upside today!

This list will be updated monthly to reflect the latest market changes and valuations, giving you a regularly refreshed look at the best opportunities.

10. JHG – JANUS HENDERSON

• Current Price/Earnings Ratio: 15,03
• 5y Avg Price/Earnings Ratio: 18,667
• Relative Discount: 24%

9. MRK – MERCK & CO

• Current Price/Earnings Ratio: 23,75
• 5y Avg Price/Earnings Ratio: 29,94
• Relative Discount: 26%

8. IBM – IBM

• Current Price/Earnings Ratio: 32,36
• 5y Avg Price/Earnings Ratio: 41,38
• Relative Discount: 28%

7. WU – WESTERN UNION

• Current Price/Earnings Ratio: 6,12
• 5y Avg Price/Earnings Ratio: 8,42
• Relative Discount: 38%

6. NEE – NEXTERA ENERGY

• Current Price/Earnings Ratio: 25,04
• 5y Avg Price/Earnings Ratio: 36,29
• Relative Discount: 45%

5. D – DOMINION ENERGY INC

• Current Price/Earnings Ratio: 21,31
• 5y Avg Price/Earnings Ratio: 33,78
• Relative Discount: 58%

4. GPC = GENUINE PARTS

• Current Price/Earnings Ratio: 18,00
• 5y Avg Price/Earnings Ratio: 53,69
• Relative Discount: 298%

3. FMC – FMC CORP

• Current Price/Earnings Ratio: 5,41
• 5y Avg Price/Earnings Ratio: 16,91
• Relative Discount: 201%

2. MO – ALTRIA GROUP INC

• Current Price/Earnings Ratio: 8,63
• 5y Avg Price/Earnings Ratio: 32,77
• Relative Discount: 279%

1. PPL – PPL CORP

• Current Price/Earnings Ratio: 29,79
• 5y Avg Price/Earnings Ratio: 131,68
• Relative Discount: 342%

Thank you for exploring the Top 10 Cheap Dividend Stocks with us! Remember, this list is a starting point for your research, highlighting potential opportunities based on current valuation metrics.

Disclaimer: This is not an investment recommendation. Always conduct your own thorough analysis and consider your financial goals, risk tolerance, and investment horizon before making any decisions. Consult with a financial advisor if needed to ensure your investments align with your overall strategy.

Stay tuned for next month’s update, where we’ll continue to highlight the stocks offering the most attractive valuations!